Whether it's your first time making a vehicle purchase, or your tenth, one of the biggest car loan mistakes people make is not budgeting for a new or used car purchase. Even when people do set a budget, they often forget the additional costs associated with owning a new car. So before you make your vehicle purchase, you need to consider how much you can afford.
Set a budget, before you shop
The key is to set a budget before you go car shopping. Using an Excel sheet, you can build a household budget. Microsoft even has a household budget template you can use. Start with the amount of money you take home, after taxes. Subtract out your known monthly expenses, as well as the monthly portion for yearly expenses. Determine how much money you have available each month to spend on a car. Monthly payments are an estimate and are for informational purposes. They do not represent a finance offer. Other tax, license, title, or fees may apply. Disclosures
Auto Affordability Calculator
Monthly payments are an estimate and are for informational purposes. They do not represent a finance offer. Other tax, license, title, or fees may apply. Disclosures
Don't base it on sales price
When deciding how much car you can buy, don't think about the sales price of the car, or the monthly payment amount. In reality, if your budget allows you to afford a certain amount for a car, like $12,000, you really shouldn't buy a $12,000 car. That's because you also have to consider taxes, licensing and registration. Those things will bring the price up a few hundred or thousand dollars. Then there are also other costs to owning a vehicle, like car insurance, fuel costs, and maintenance costs. All these things need to be included in your budget in order for you to purchase a car without straining your finances.
Think about the type of car you want and need
Keep in mind that the type of car you select can be extremely important to its overall affordability. For example, a sports car may use more gas and require premium gas, which increases your gas expense over other cars. Certain makes or models may lose their value over time faster than others. And an older used car may have more risk for maintenance costs. Make sure you consider these things when budgeting for your new car.
The bottom line
The bottom line is, don't look at your budget and decide you have so much to spend and spend it all without thinking about all the other costs associated with owning your new (or used) car. Include those in your budgeting as well, and you'll be happy you did.